To cap tuition, aim funds at schools

Americans carry more debt on their student loans than their credit cards — more than $1 trillion annually. This places a huge burden on students, banks and taxpayers alike. Student debt presents one of the biggest threats to our economy.

A driving force behind this looming debt crisis is skyrocketing tuition prices. Despite decades of generous loan policies from the federal government, the cost of attending a public or private university has increased more than twice as fast as the consumer price index over the past three decades.

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Federal loan policy and education tax credits have failed, in the long term, to make college more affordable. In fact, they may well have made the problem worse.

Rather than subsidizing students on an individual basis, the government should pump funds directly into the state university systems. This would help make state schools more attractive to students, while keeping tuition low.

But first, why has the current policy failed to control costs?

One reason is because colleges are so unlike other businesses, the economist Andrew Gillen of the Center for College Affordability and Productivity has explained. For example, when the federal government subsidizes gasoline, the price goes down. But when it subsidizes the cost of higher education by giving aid directly to students, the price stays the same — and may increase.

Unlike for-profit institutions, universities cannot distribute their revenue among shareholders. Instead, all earnings are folded back into the school itself, Gillen writes. While perks like high-profile faculty and improved facilities are great for current students, applicants will have to pay more to compensate for rising costs. Financial aid and operating costs are engaged in a vicious cycle.

In addition, colleges don’t measure success the same way other businesses do. A bachelor’s degree cannot be assigned a simple numerical value. After all, the true benefits of higher education are social and cultural, as well as economic. For this reason, Gillen writes, colleges tend to measure themselves, and each other, according to “prestige” rather than “value.”

In their quest to gain prestige, universities are engaged in a constant competition over who has the shiniest new buildings, who produces the best research and whose equipment is more state of the art. Rather than lowering costs or admitting more students, they almost always use revenue to strengthen their position in the all-important rankings — which, over time, sends costs and tuition even higher.

The idea that federal aid actually increases the price of college — commonly known as the Bennett Hypothesis, after Education Secretary William Bennett, who first wrote about it in a New York Times op-ed in 1987 — has profound implications for federal aid policy. It means that officials must be careful to ensure that higher education subsidies do not backfire.

If they are to make college more affordable in the long term, federal tuition policies need to make aid smarter — not just more plentiful.